[From Pixabay]
Read Part 1 on the paradoxes that will shape geo-economics and part 2 on the multi-layered alliances shaping geopolitics. Or follow this page for the full series.
New contours are being drawn across global economic and power systems, with some clear, though layered, silhouettes of alliances emerging, each based in realist international relations paradigms. A dual hegemon world is shaping up but it’s a world where the hegemons and, indeed, other nation-states will be entwined with both in a complex web of technology, supply chains, finance and security considerations.
Clearly, it’s no longer Pax-Americana, nor is the US the sole economic superpower. Its military might or might not reign supreme, but it’s needed to continue playing the role of a security provider globally. Since World War II, it’s been the US that has arguably played an outsized role in keeping ocean routes free for trade, an umbrella that China still thrives under.
Further, China alone cannot drive the global product or financial markets and investments, though it plays a crucial role. New entrants in global finance like the massive sovereign funds of the oil and gas producing countries are now also being invested globally, though China is certainly a key destination, more so with Western funds gradually beginning to exit. Some analysts have attributed the Gulf Cooperation Council’s (GCC’s) willingness to invest in China to cultural affinities arising between authoritarian states.
“Though the role of the emerging markets is growing, few would like the financial markets to go under a Chinese umbrella”
However, the US and the EU, rather than China, will collectively exercise greater control over both the global commodity and financial markets through their market size and willingness to both drive and invite capital. Though the role of the emerging markets is growing, few would like the financial markets to go under a Chinese umbrella, more so after Xi Jinping tightened economic controls within China and indicated that his regime does not believe that unfettered capital should hold sway over economic issues. Global capital loathes controls.
Be that as it may, what is the future of hegemony in this complexly layered world? Back in 1984, the international relations theorist, Robert Keohane, postulated that as the US became less preponderant in material resources, its hegemonic powers would wane, and indeed a bipolar world has taken shape.
In a recent 2023 paper, Christopher Clayton, Matteo Maggiori and Jesse Schreger postulated that “geopolitical power arises from the ability of a country to consolidate disparate threats across multiple economic domains, often with some of the threats carried out by third party entities also being pressured, to induce a target to take a desired action.”
The authors further stated: “Geopolitical power arises when a hegemon is able to join together various incentive compatibility constraints into a consolidated constraint. A hegemon can do this because it can threaten to punish a country for violating a constraint not just in the domain that it deviated, but across various markets that it controls.”
“The US’ power to induce action and punish has not amounted to much in recent decades”
If these criteria are to be used to assess the power that a US or a China possesses and will likely possess over the next 5-7 years, neither fits into the framework of an absolute hegemon.
The US’ power to induce action and punish has not amounted to much in recent decades. Neither sanctions over Russia, nor its recent military actions in Afghanistan and Iraq have been wholly successful. As Keohane presciently wrote in 1984: “The subjective elements of American hegemony have been eroded, as much as the tangible power resources upon which hegemonic systems rest.”
“China’s network of alliances is still somewhat fragile. Its behaviour in the Middle East conflict indicates that Beijing recognises this fact”
But China has not yet truly attempted to exercise any absolute hegemonic power; its bellicose behaviour in Asia remains just that at the moment—bellicosity. Beijing is not in a position where it can impose constraints and induce outcomes either.
For one, China is in the process of building a network of economic alliances. At the moment these alliances are still somewhat fragile. Its behaviour in the Middle East conflict indicates that Beijing recognises this fact. For another, though China’s centrality to supply chains and trade is undoubted, Beijing’s ability to control supply chains by imposing threatening constraints is limited.
Any hard action on that front will only impact China’s own economy, and that is a position the Chinese Communist Party (CCP) will never want to be put into. The CCP will also worry about, and carefully watch, the rising levels of economic nationalism globally, and indeed capital flight from its shores if it does push the envelope on policy and information restrictions too far. The CCP will increasingly recognise that economic nationalism across the globe is the paradigm of the future. Xi’s actions will be watched charily internally, and much will hinge on how he, and China’s economy, shape up to the challenge.
Much will depend upon China, however. If China continues viewing the world in historical terms, with Beijing at its centre, today’s geopolitical and geo-economic complexities will worsen. Whether it will continue to do so, is something that will be more apparent in the five-year time frame of this analysis.
Though the US has lost considerable advantages in the hegemonic stakes, its collective power drawn from economic and security alliances with the EU, Japan, South Korea, Australia, and even perhaps India, will remain a force to reckon with alongside its power across markets, finance and technology. In the realm of defence and war, the willingness of this alliance to commit further than they have will depend upon their relative economic position globally and their immediate, realist defence needs. Nevertheless, Russia and China’s actions have driven these countries towards building stronger militaries that appear more willing to cooperate with each other. NATO, despite the rhetoric, will be an alliance that neither the US nor Europe will give up easily.
“India will increasingly be drawn into a US bloc, given both its economic and security needs”
Going forward, the indications are that the EU, Japan, South Korea, South East Asia, India, etc.—the globe’s current and emerging industrial powerhouses—will increasingly align their trade with the US in several technology-driven sectors but like the rest of the world will remain dependent upon China for several intermediate products and will not be able to completely disentangle from China.
The Middle East will also straddle both blocs. It will depend upon the US for security balance but will be increasingly drawn to China’s investment and technology. It will also be drawn to China’s inward FDI markets since that country will remain a significant market, unless its deflationary tendencies and overcapacities take it into a Japan in the 1990s kind of scenario—which saw the beginning of Japan’s recession and the Lost Decade.
Iran will remain economically emboldened by China and militarily emboldened by Russia but will gradually lose its currency in the Middle East, even though the likes of the Hezbollah and the Houthis will continue to bother the world. India will increasingly be drawn into a US bloc, given both its economic and security needs.
“Nothing rules out the probability of realism-led, compromised, but economically effective, cooperation between the two blocs”
If over the next five years, the world remains without a deeper, more intense pan-regional war, today’s asymmetrical cooperation between the distinctly emerging US-led bloc and the China-Russia dominated bloc could be built upon, supported and maintained, boosting the global economy. Nothing rules out the probability of realism-led, compromised, but economically effective, cooperation between the two blocs, more so because the contrary would lead to destructive economic outcomes, something China would baulk at.
A June 2023 article in the IMF’s Finance & Development magazine argued that if nations were placed in a position where they must align with either a US-EU or China-Russia trade bloc, output losses of as much as 2.3% of global GDP could occur. The report added: “Advanced economies and emerging markets could face permanent losses of between 2% and 3%, while low-income countries are at risk of losing more than 4% of their GDP. These losses could deepen risks of debt crises, exacerbate social instability, and increase food insecurity. The most vulnerable nations, heavily dependent on the imports and exports of key commodities, will find it particularly costly to adapt to new suppliers under fragmented trade conditions.”
In today’s industrially entwined world that scenario is not probable. However, destructive economic conflict is often a result of political fragmentation and vice versa. Hegemons, current or potential, must keep that in mind.
Read the entire series here.
